Who Spends on Jewelry: Income Levels Are Key

February 08, 17by

While averages can be deceiving when trying to describe the total universe of American households, they can be much more meaningful when analysts drill down into the data for a particular product category, such as jewelry.

With sophisticated mathematical analysis, researchers can determine which demographic factors are key in determining the likelihood that a consumer is going to purchase jewelry.

When we examine the demographic factors that are most likely to predict which consumers will purchase jewelry, it becomes clear that there is one overriding factor that greatly increases their propensity to buy jewelry: income levels.

As income levels rise, the likelihood of jewelry purchases rises much faster. For example, households with annual incomes of $150,000 – six times the level of the base household with just $25,000 annual income – will typically spend 13 times as much annually on jewelry as that base household. (As incomes rise linearly, jewelry spending rises exponentially.)

In addition to income levels, there are two other demographic factors that are also “markers” of potential high spending on jewelry: education and occupation.

Better educated consumers are much more likely to spend heavily on jewelry. They are also much more likely to have significantly greater earnings than less-well educated consumers.

White collar professionals are much more likely to spend heavily on jewelry. White collar professional jobs are among the highest paying jobs in the market.

Therefore, it could be argued – strongly, we note – that the single key factor driving the likelihood of consumers to spend on jewelry is their income level. Education levels and occupation simply help identify those consumers with higher-than-average income levels.

Table 1 summarizes the key demographic factors of consumers most likely to buy jewelry, based on 2007 data from the CES.

The top three factors have the greatest weight. The other factors have far less impact on the likelihood of a consumer to purchase jewelry. When multi-year averages are calculated, it becomes apparent that the demographic factors beginning with “age”, and running down the list to “location” simply do not have a meaningful impact on the propensity of a consumer to purchase jewelry.

Making Use of This Demographic Data

We continue to recommend that jewelers mine their existing customer base for sales. Target loyal customers with buying ideas. Initiate a “friend-finding” program: existing customers who bring a friend to the store receive a discount on their next purchase (whether the friend buys something or not). This technique insures that jewelers will get new customers who look a lot like existing loyal customers.

Never ever try to profile a customer who walks in through the front door. That scruffy looking farmer may have thousands of dollars rolled up in those bib overalls. Treat him like he’s a king, and he’ll give you the gold.

When it comes to targeting new potential customers, demographic profiles can be very helpful. However, IDEX Online Research recommends the use of a marketing agency with specific skills in merging demographic data with mailing lists and other target marketing tools. This is not a do-it-yourself program for jewelers.

BACKGROUND:

Averages Can Be Deceiving

With roughly 120 million households in America – representing just over 301 million people in mid-2007 – it is difficult to describe the “average” household. However, with the power of math, the typical “average” American household can be determined, even if no single household looks exactly like the “average” household.

Based on data from the CES, here’s what the “average” American household looked like each of the past five years:

Table 2 highlights three major changes over the past five years: 1) the number of U.S. households continues to grow 2) household income is increasing steadily and 3) the average age of the head of U.S. households continues to rise, though modestly.

However, the data behind these “averages” is much more meaningful for demographers, analysts and marketers as well as any one else who can make use of these figures.

Table 3 summarizes some of the components of the key demographic factors that describe the “average” American household.

Other Statistical Aberrations Affect the Data

IDEX Online Research has CES databases back to 1984 for certain demographic factors. We have noticed over the years that there will often be an aberration in the data for a demographic factor in a one-year period that does not replicate itself in prior or subsequent years. Thus, we prefer to use a four or five year moving average to gain the most reliability from the data.

Why do these statistical aberrations in the data occur? We believe that the survey uses some of the most sophisticated sampling techniques available. But it is just that: a sample. Roughly 40,000 to 50,000 households are sampled annually, on a rotating quarterly basis. That’s about 0.03 percent of all American households. As we say, the data derived from the survey is better than no data at all, but its projectability has limits.

The major problem with the CES is that the data is almost two years old before it is published. Even with the government’s vast computing power, it takes months to compile and analyze the data.

Income: If They’ve Got Money, They Will Spend It on Jewelry

If you are a jeweler and you’re trying to keep your target marketing strategy simple, you can forget all of the other demographic factors except for household income levels.

If you are trying to figure out which income levels to target, our advice is concise: aim high. Here’s why:

A household with income of about $25,000 spends about $188 per year on jewelry.

A household with income of about $150,000 spends about $2,440 per year on jewelry.

Thus, when household income rises by a factor of six times – $25,000 to $150,000, jewelry spending rises by a factor of 13 times – $162 to $2,403.

Jewelry Expenditures by Income Level

The average U.S. household spent $545 on jewelry in 2006, as the graph below illustrates. At the lowest income levels, consumer households with less than $15,000 in reported income spent an average of only $105 on jewelry, all of which was inexpensive fashion jewelry. Among the highest income consumers – those households with $70,000 or more in annual income – shoppers spent just over $1,100 annually on jewelry.

When jewelry spending data by income levels is analyzed over a five-year period, the shape of the curve is basically unchanged. Thus, it is reasonable to conclude that higher income consumers consistently – year-after-year – spend disproportionately more on jewelry than lower income consumers.

High-Income Households Hold Most Potential

While jewelry expenditures by income range don’t exactly fit the proverbial 80/20 rule (it would suggest that 20 percent of all consumers make 80 percent of all jewelry expenditures), spending by high-income consumers isn’t all that far from the 80/20 rule. In fact, 31 percent of all U.S. high-income households – those with incomes over $70,000 annually – make 64 percent of all jewelry expenditures each year.

In 2009, high-income consumers – those earning over $70,000 annually – will account for more than $41 billion in sales of the projected $64-65 billion annual sales for the aggregate U.S. jewelry industry.

A Huge Untapped Market

More importantly, these higher income consumers are a vast untapped market. On average, just under one-in-three of these high-income households shop for jewelry annually; that compares to one-in-five household that shop for jewelry across all income levels. Here’s what this means: of the 37.3 million households (31 percent of total U.S. households) that earn $70,000 or more, only about 11 million of them buy jewelry. This means there are 26 million high-income households – those with the highest likelihood to buy jewelry – that don’t come into a jewelry store during the year.

Table 4 illustrates the number of households by income level who actually buy jewelry (data is for 2007) and the average amount they typically spend.Thus, the task of the jewelry industry is to reach this giant untapped market, and move them to open their wallets and buy jewelry.

The challenge, of course, is how to reach higher income households that hold so much potential. The use of “mass media” advertising is relatively inefficient. That’s because 55 percent of U.S. households earn under $50,000 annually – the “mass market” – and they account for a scant 22 percent of all jewelry expenditures. Clearly, target marketing via direct media – mail, telephone, e-mail, social networking – are the tools that jewelers can use to reach this lucrative group of potential jewelry purchasers.

Graph 2 summarizes the percentage of households by income level versus their aggregate annual expenditures for jewelry.

Long Term Income Growth Potential Is Dramatic

Based on income growth projections by the Conference Board, an estimated 44 percent of all U.S. households will have incomes of $70,000 or greater by 2017. This represents a spectacular opportunity for jewelers. These households could account for nearly 80 percent of all jewelry spending in the U.S. within ten years.

Graph 3 illustrates the percentage of U.S. households in each income range in 1997, 2007 and 2017 estimated. Clearly, the number of high-income households is expected to continue to rise sharply over the next decade.

Further, according to the Conference Board, Baby Boomers will account for only about half of all affluent households in ten years, down from about 60 percent today. Younger Generation-X and Millennial consumers will become a major portion of the affluent market. Generation-X households could account for as many as 37 percent of all affluent households in 2015. The most stunning statistic is the importance of the Millennials (born between 1979 and 1998): in 2007, they accounted for virtually none of the affluent households, but they could account for 13 percent of all affluent households in ten years.

It is important for jewelers to recognize that the way to reach Gen-Xers and Millennials differs substantially from marketing strategies to reach Boomers.